BP’s Oil Spill Cost Uncertainties Continue

Since the 2010 Deepwater Horizon incident, BP Plc (NYSE:BP) has incurred costs and provisioned as much as $42.2 billion for the various charges and claims arising from the incident. This includes the $20 billion contribution to the Deepwater Horizon Oil Spill Trust fund, which was set up by the company in agreement with the U.S. government to pay individual and business claims, penalties resulting from litigation judgments and settlement of litigations, state and local response costs and claims, as well as natural resource damages and related costs.

However, there are huge uncertainties associated with the amount of future liabilities that the company might have to bear, which can potentially turn out to be far more than what it has currently provisioned for. The possible extension of the deadline for submitting claims under the settlement agreement reached by the company with the plaintiffs’ steering committee (PSC) last year only makes matters worse for investors. ^[1]

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Rising Uncertainty Over Settlement Claims

Growing uncertainties over the amount of oil spill liabilities that BP might have to bear are a drag on the company’s strong operational outlook. (See: BP Revised To $47: Improving Production Outlook Outweighs Spill Costs Uncertainty) BP initially estimated the cost of settling a substantial majority of legitimate individual and business claims arising from the incident at $7.8 billion, and entered into an agreement with the PSC for the same. However, the company noted that claims related to business economic losses were being paid out at a significantly higher average amount than previously estimated and subsequently refrained from guiding on the total amount of charges it might have to bear to settle all the claims under the agreement.

However, along with the second quarter earning results, BP announced that it has increased the charge for the settlement to $9.6 billion to reflect the higher costs of claims and litigation, and it gave no guidance on future liabilities that can arise from similar claims under the agreement. Moreover, the fact that its petition to temporarily halt settlement payments while misconduct in the claim settlement procedure was being probed was refused further hurt the company’s prospects of being able to substantially limit the amount of settlement charges. Now, both sides of the settlement agreement say that the flexible April 2014 deadline for filing compensation claims against BP can possibly move well into 2015. The estimate on the extension is based on the understanding that the resolution of all legal appeals about the settlement’s validity can take much longer. While this does not necessarily imply that BP might actually have to pay out a lot more for settling all the claims than currently estimated, the extension of the process does increase the uncertainty over the issue.

On the other hand, uncertainties over the outcome of the civil trial in the U.S., which can potentially increase the company’s oil spill liabilities by as much as $14 billion continue to weigh on its valuation. (See: BP’s Downside Risk From Climbing Oil Spill Expenses)

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1. BP spill claims deadline may slip by year or more, reuters.com [↩]